We propose an approach to digital currency that would allow people without
banking relationships to transact electronically and privately, including both
internet purchases and point-of-sale purchases that are required to be
cashless. Our proposal introduces a government-backed, privately-operated
digital currency infrastructure to ensure that every transaction is registered
by a bank or money services business, and it relies upon non-custodial wallets
backed by privacy-enhancing technology such as zero-knowledge proofs to ensure
that transaction counterparties are not revealed. We also propose an approach
to digital currency that would allow for more efficient and transparent
clearing, settlement, and management of systemic risk. We argue that our system
can preserve the salient features of cash, including privacy,
owner-custodianship, fungibility, and accessibility, while also preserving
fractional reserve banking and the existing two-tiered banking system. We also
show that it is possible to introduce regulation of digital currency
transactions involving non-custodial wallets while still allowing non-custodial
wallets that protect the privacy of end-users.

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